Appian Corporation (APPN) Earnings Call Transcript & Summary

All right. I think we'll go ahead and get started here. Thanks, everyone. Kevin Kumar, I cover Appian here at Goldman. I'm pleased to have Marc Wilson, Co-Founder and Chief Executive Ambassador; and Mark Matheos, CFO of Appian. Thank you so much for being here.

Thanks, Kevin.

I thought a good place to start would be maybe just a brief overview of your background. I know that's kind of evolved over the years here and kind of your current role at Appian.

Sure. So I'm one of the guys that's been here since day 1, and we celebrated our 25th anniversary just a few weeks ago. And over that life span at Appian, I've had a lot of different roles, done everything from run large projects to run services to really spending the better part of the last 15 years focused on sales efforts, whether it was building our industry programs, building our partner organization and now focused on really getting us higher into organizations and getting our executives more involved in projects.

Yes. I'm Mark Matheos. I've been with Appian for 8 years. Started out kind of right before the IPO as Controller and then Chief Accounting Officer and then over time, got my hands dirty with all this other sort of ancillary finance things like Investor Relations, Treasury and FP&A, and became the CFO about 3 years ago.

Great. Appian is I think, just hit its 25th anniversary. And so I thought it would be useful, given the long history of the company, maybe just a brief overview of Appian, how the product set has kind of evolved over the years and the value prop to the enterprise base that you serve?

Sure. So, our first forays into software are actually in portal technology, so just around the turn of the century, dare I say it, in 2000, 2001. But we broke out of that into what became known as the business process management space. We became a leader in that space fairly early on in our push into it, so I'd figure 2007, 2008, 2009, and that's really where we grew into sort of foundationally what we are today. Now when we were in the BPM space, we were much more focused on the customer experience in that space, came from our portal experience. It wasn't so much how we're going to do back-end processes, but how we were going to be looking at collaborative BPM, collaborative process and enhancements with end users, and we leveraged that to bring a lot of innovations to that space, really holistically being web-based, web-based process designers, web-based form designers, things the market had never really seen before. And that was really where our focus was. And we stood by as one of the leaders in this space as one by one, virtually every one of our competitors was bought by one or more companies with a couple of those companies buying multiple ones of our competitors and then gracefully killing them off and leaving us as one of the last remaining companies standing in the space. Now BPM evolved into various different terms over time, evolved to BPMS, iBPMS, iPaaS, all sorts of weird names that Gartner came up with through the years. Because of our foundations in building, again, web-based design tools, we like to think of ourselves as one of the foundational companies for what has now become known as the low-code space. And for us, low-code was a method of building, not a product in and of itself. And that, of course, has been, again, bastardized by the technology terms of today. But BPM, BPMS gave way to low-code concepts, gave way to what we call process automation, which is really where I consider where we're at today. And we've added so many sort of, again, foundational feature sets to the product that I think really stand us apart, not just having the process or case management focus, but the data focus that we brought and really bringing now more of an understanding of business orchestration, process orchestration that is not just combined to process. But again, you have the data elements, RPA elements, AI elements to provide an end-to-end journey experience for what we do with our customers.

Yes. That's a great overview. Maybe to follow up on that. You serve a couple of core verticals, but if you can provide just an example maybe of a recent customer win, kind of how you came on, what was the problem that you solved and the use case for that customer?

Sure. So amongst our biggest industries, without question, are financial services and insurance, public sector remains uniquely a very strong industry for Appian and life sciences. And I could touch briefly on some of those. We had our big user group conferences, what we call Appian Around the World event in Australia last week, and one of our customers that spoke there was Westpac, one of the larger banks in Australia. And they spoke about their Appian journey and they've done a number of things with us that they mentioned there. One is how we're involved pretty heavily in their credit card area, where we're helping them with exceptions case management for onboarding credit cards. And then that gave way to another area they like talking about, get into more private wealth areas where we're doing KYC, AML applications and tying that together. In the pharmaceutical space, a whole wealth of different applications we've taken on, and Novartis stands out as a good example customer for us. They, again, presented at Appian World earlier this year, where they talked about leveraging Appian in their ethics and compliance applications. So basically tracking their spend as well as tracking issue concern elements that -- and again, necessary -- a mission-critical application that's necessary from a regulatory perspective for them to have around the world. That's been a cornerstone app for them there. So 2 good examples.

No, that's great. Maybe shifting gears a little bit on -- we get this question a lot, just given your role interfacing with customers, maybe talk a bit about just macro. What are you seeing from kind of a buying perspective, willingness to -- these are very mission-critical kind of applications, right? And so what's the willingness right now within that enterprise base to kind of modernize these systems?

Well, I think that this goes through various waves, and there's no overarching consistency that's to a T. For every customer that we feel that is going into its next generation, we'll turn up another prospect or customer that's generations behind. But I think one of the things that we're seeing that -- out there that we're uniquely capable of helping to solve are transformation initiatives that are getting beyond the mere digitization of discrete applications. And what I mean by that is that they're starting to get into transformation that cuts into what the real problem is, is that you have 50, 100 different systems that make up a journey for a customer or a journey for a product, and they can't stitch that together to really truly achieve some value return, whether it's better customer satisfaction or speed to market or decreasing cost, that's difficult to do. Because they've spent so much time trying to fix one problem after another, and you create silos because it's sort of a whack-a-mole experience of the new problem crops up. And that's a lot of the kind of use cases that we're taking on. So we're seeing that a lot. I think as you mentioned in the macro, I think one of the dominant conversations, of course, it's dominant here, it's dominant in every investor conference is everybody wants to know about AI. So I think one of the big transitions that we -- that I've seen personally is we've gone from tell me about your features to tell me what you've done and that is a subtle but important point that people want to hear the stories. They don't want to hear about the features. So I think a lot of people are trying to figure out what they can do. I think there's a lot of desire and willingness to do something, but there's still a lot of uncertainty about what that means. The truth of the matter is, it means different things to different organizations. And AI to us is not a stand-alone technology, it's a complementary technology with what gets done. And I think that's why a lot of these questions are pointed our way because AI just for AI's sake it's an interesting science experiment, but you got to plug it into a process. Its got to be able to consume data. And we're in a unique position to provide both of those to companies that are looking to go down that path.

So I want to dig into the AI topic for sure in a minute, but maybe sticking to the customer profile. I guess you talked about some of the verticals Appian is strong in. What's the ideal customer for Appian? And I think that's evolved over the last couple of years. So maybe talk a bit about kind of where the go-to-market perhaps or where Appian is focused in terms of targeting the right customer profile?

So we are definitely focused right now on targeting larger customers that have complex problems, that tend to have complex problems that are multifaceted in nature. It's not one application, it's how do you tie together a bunch of things. We're looking for organizations that are trying to drive real value out of these investments. So in a lot of times, that value manifests itself with Appian in terms of trying to get a competitive advantage, trying to drive down costs or increase efficiencies. And there's real ROI to be gathered in any one or any combination of all of those. And a lot of times, obviously, what we do is very process-centric. There are processes to be improved, an onboarding process, a customer journey process, a compliance process or any combination thereof. A lot of times, when we talk about onboarding experience is part of the onboarding experience is going through the compliance processes that exists. So that's the kind of customer we're looking for. We're starting to see customers that don't just have a dozen applications on Appian, but literally have hundreds and that's going to soon give way to thousands. And those are not small. All those are big applications or they run the whole spectrum, but there's definitely a focus on the value coming from the most complex to maybe the mid-range of complexity. So those are our big customers and our big industries tend to mirror exactly those areas, financial services, pharma, public sector, the more regulated, the more -- the more regulated industry.

And it seems like there's a trend here where some of your biggest customers, the ones who have already found lot of value with the platform, they're growing really nicely. And so curious how the firm thinks about kind of expansion within those really critical large customers versus net new. Is there kind of a balance there? How do you guys think about kind of that expansion motion versus net new logo growth?

So I think, particularly for people who are new to the Appian story, you have to understand the answer to this question to truly get Appian. So when we look at our customer base, we absolutely look at our customer base through the lens of looking to have about 2/3 of our software revenue coming through expansion and 1/3 through the new logo acquisition process. We are uniquely in a situation where we can go to any person that works inside of an organization and make a case for why our software can help what they do. It doesn't matter whether you're talking about the custodial staff or the C-suite and everything in between. A lot of other software is targeted to a particular function like marketing or a particular, very specific use case. We're going to be much broader than that. We have cases that go into the legal department or the HR department and certainly the lines of business. So that's how we think about it. And consequently, our activity is not only focused on new logo acquisition, it's definitely focused on expansion. It's focused on new logo acquisition because we know that we can get a lot out of our customers in the long term.

So I wanted to shift to maybe go-to-market. I know last earnings, you discussed some changes there. I guess maybe run through kind of what changed? What were the metrics that you saw that made you want to make those changes and maybe any updates to the go-to-market since then?

I'm happy to start off with that and then hand that over to Mark. The -- I think one of the things that we had found that we had done is that we had been a little too profligate with investments that we had made outside of what has traditionally been our core. We've gotten a little bit more aggressive in going after SMB markets. We got maybe a little bit more aggressive outside of core industries. And while we were seeing successes in those spaces, we're trying to orient ourselves around the best value in our continued growth story right now. So our efforts -- we scaled back some of our efforts in areas that we felt we were limiting our focus on core areas. So we put more into getting out of the SMB space, not entirely, but less of a focus there, putting more back of the onus on those bigger organizations in core industries that we're on. And I think we're seeing that as a good decision right now. And I think, Mark, you can echo that.

Yes. I mean if you look at the -- the summary of what Marc just said, it's really about efficiency and trying to grow efficiently. We have a profitability path that we've been talking about for about 3 years now. In 2022, we had about a $76 million adjusted EBITDA loss that went to around $45 million or so last year. And then this year, we're talking about breakeven for the full year 2024 which is a considerable improvement over our initial guidance for the year. And so we're looking at doing 2 things, right? Refining our strategy so that we can get the best bang for our go-to-market buck. And then also kind of adhering to that promise of profitability. And I think efficient growth is going to be the name of the game. I think we certainly have a big market that's growing in front of us in our kind of critical key verticals. And there's a lot of customers with us today that we can see doubling and tripling in size. And that's really where a lot of our effort is going to be. And then also, to Marc's point, large customers that are new logos that can be on that same trajectory a year or 2 from now as well.

Yes. I guess maybe on that point, I think there were some incremental head count reductions. But as you think about kind of sales capacity and as your sales force gets more tenured, do you have kind of a high-level way of thinking about sales productivity? Do you have the right capacity to meet those growth targets? I guess what's kind of the framework there?

We absolutely have enough capacity. We certainly look at productivity as a critical metric that we're trying to improve. And if you think about it, when we kind of refocus our strategy, we also give a little bit of a gift to our existing sales team. Those that are performing well get additional territories, get an additional way to make money. And we certainly have those with a track record of success that now have even more excitement around their ability to go ahead and make those new sales in their territory. But yes, there's no kind of concern with a constraint on capacity.

So I want to ask about, I guess, the Appian secret sauce, the differentiation. I think Marc, you kind of touched on this a little bit. It's a workflow automation tool. There's a lot of ways of leveraging the platform, you have kind of solutions out there that for common use cases, but I guess maybe talk about the differentiation versus maybe other vendors in the space and where you've had really good success in terms of kind of common use cases?

Sure. So I think there's a -- think of that in 3 buckets. First, we build applications. We help organizations build applications. And sometimes they're really simple applications, they replace Excel spreadsheets. But most of our business is in the midrange and certainly into the high end of the complexity range. We've had organizations that have built clinical trials management systems or claims management systems on Appian. And some of the competitive advantages that we have there are, first and foremost, that the same way you build something really -- in a really complex manner, you can build it in a simple manner, which gives organizations the ability to use this in a more flexible manner than others. Most of our competitors or that -- organizations that perceive of themselves as competitive with what we do, have what I'd like to call a very low complexity ceiling. You're not going to build a highly complex apps on those platforms. So when you start going into a bank or you go into a pharmaceutical company or to a big government agency and there's something that requires a lot of scale, something that has a lot of complexity, something that has a lot of permutations to a process or permutations to a case, many tools are found wanting fairly quickly. And particularly, even what you'd consider to be very large names become wanting really quickly in that regard. So we have a big advantage when it comes to being able to handle complexity and particularly complexity at scale. The second thing that we do that I think is somewhat unique is that we sit on top of or next to other systems and organizations. And we fill in the white space around them. So we'll sit on top of an ERP system or a CRM system, and it takes advantage of our data fabric capability that allows us to leave data where it lies and core systems of record, but treat it architecturally as if it was inside of Appian. And this is contrary the way most software vendors operate where they tend to operate along the maxim that in order to be useful to an organization, they need to own the data of the organization in, whatever they want to call it, a cloud or they want to call out their own data store, we don't operate that way. So we become much more flexible in terms of how we operate. And the final thing that we do is we can tie together, as I mentioned, multiple different systems to connect and unify people, process and data. And that ability to bring together that journey to help things across the spectrum is quite powerful. And we do all of these things by also offering a lot of complementary capabilities that come in. So whether it's the latest and greatest in AI or whether it's what we're doing now and something that we call process HQ to really give a real-time assessment about how processes are performing and value judgments on them sort of round out this overall continuous improvement notion that we bring to process. So we -- when push comes to shove, we really do stand in stark contrast to most of the competitive products out there.

I guess on the point of competition, has that been kind of the same for a while? Like I get asked often about some of the bigger vendors, even Salesforce or ServiceNow. So maybe just talk about the evolution of the competitive landscape. Who do you see most often? And if that's changed over time?

So the competitors that we historically have seen, the #1 competitor that we have historically seen is, oh, we're going to build something ourselves, and that's waned over time. And you go back a decade and our competitors were a lot of other smaller BPM companies. Or maybe IBM bought Lombardi and suddenly, we had to deal with that for a little while. Today, if you sort of exclude those and you exclude fit-for-purpose, very specific SaaS applications, which always tend to appear from now and then. I would tend to view our competitors and basically, we see 4 companies again and again. One is going to be Pega they tend compete with us on the complex side. They've obviously had their issues. We've, I think, really in most places been in a much more dominant position over them. We've been growing faster than them even in organizations that we're both in. And on the low end of the complexity scale, we've tended to see the Microsofts, the Salesforces and the ServiceNows. And when I talk about a low complexity ceiling, I'm largely talking about those 3 companies, there's a limit to what you're going to do. They're not going to do journeys very well. Their data strategy really isn't comprehensive, but they tend to have strong perceived positions because of maybe larger deals around ITSM or CRM or the Azure contract that someone signed last year, so we need to consume Microsoft. So people are always trying to get them to do a bit more than I think that they're capable of doing. So that can have a level of competitiveness that we always have to deal with -- but I generally -- I mean you can't find a customer of girth that we're at, where one or in some cases, all 4 of those competitors are also at. So there's very much a coexistence experience that we also have.

I wanted to ask about the solution -- I guess, the prebuilt solutions. I know you've had good success on the government side, for example, I think you talked about the financial services. But maybe just talk about kind of the evolution there? How big of a growth contributor is that -- and yes, like I said, I think government is probably the most mature example of that, but do you see that kind of flowing into some of the other verticals as well?

So your government acquisition management is certainly our most successful solution that we built. And we have a long track record before we built that solution of being leveraged as an effective platform for helping manage procurement cycles in the government. And we took that experience and we productized it. And we have lots of different agencies at the federal level, and now we're starting to see that at the state level as well. And I think that's been a growth area for us. I'm not going to necessarily put numbers on it, but it's been exciting to see. It's a great entry point for us to be doing more robust things at the government level. We've also had solutions or have solutions in financial services and in insurance around onboarding, around claims management, a little bit of KYC and AML that gets included in there. And we're going to continue to look for solutions that we can bring in there because we both think it's a good area for us. It's easy to build solutions on top of Appian. And we think it's a productive way of creating easier entry points with customers. And we also think there's a lot of value to be had in those solutions. So we have a solutions group that continues to see successes there. I think it contributes to our growth. I don't think we're comfortable yet talking about the extent to which that does. It's still very much proving itself.

Yes. Got it. I wanted to ask about partners. I think there's been some changes in terms of the way you manage your partner relationships, maybe tightening the focus a bit. So maybe just walk through kind of the changes there and any early kind of learnings from the shifts there?

Sure. So there was a time and place where we had hundreds of partners that had pieces of paper that said that they were partners with us. I think a lot of people have been through that phase of existence as they buttress that world. The essence of our partner organization is about increasing the number of people capable of explaining what we do. The larger partners out there have access to the corridors of power. They know what's being worked on. They know the initiatives of organizations. They have decades or more longer relationships that they're in a position to extol our virtues in ways that make sense. And in return, the partners are getting an opportunity by leveraging Appian to increase their share of wallet for the customers that they service in a way that's productive because we generally are considered one of the best in delivering a satisfied customer experience when you deliver with Appian. So the changes that we've endeavored in our partner organization is to bring more focus to it, to concentrate our investment areas on more partners to get them to invest more, to look more at things. So I can't think of a better example than 2 weeks ago, where I had the opportunity with one of those focused partners to speak, I think it was pushing 800, 900 people globally around the world, the partners that are focused on the core industries that we're talking about. So we're getting access to partners at that level, particularly as either their practices have achieved and surpassed $100 million a year or are well on the way to achieving that. So we're being seen now as a partnership of significance at our focus partners, which, of course, creates more investment on their end, which gets us to invest more and a nice cycle develops -- to develop. That's what we wanted out of that, and I think we're getting that.

Can you discuss the relationship Appian has with the cloud vendors? And how does Appian work with them from, I guess, a product integration perspective?

So we were one of the very first software products to be cloud-ready in the way -- even the way we think about it today. We were laughed at in 2007 as we got started in. Wisely, we chose very early on the one vendor that existed to do that, and that was AWS. And we think we've had an exceptionally good relationship with AWS through the years. We've helped AWS. They've helped us. We helped a lot of ways sort of breakdown barriers in the government space, in the life sciences space and other spaces. And we've tooled our cloud service definitely around AWS, and it's allowed us as they've grown to get into many, many more markets, to allow us to do things that our customers demanded. Failover capability, the high availability that existed with our customers. And as they keep adding services, we will go along with that. A lot of our AI investments have taken advantage of the continuing developments that Amazon has put into their own LLMs that have allowed us to create walled-off LLM instances for our customers to essentially create private AI -- well, to create private AI experiences for them that aren't forcing them to share their data in ways that they don't want to share their data, preserve security for it. So AWS has been a major focus of ours, I'd say, to the -- largely to the exclusion of others today. Now certainly, we have a level of relationships with the Googles and Microsofts, but AWS has been the main focus.

Yes. Could -- maybe as you expand those relationships, could they potentially be distribution partners for Appian?

I mean we have relationships today that allow them to do it. And I think the -- we're part of programs with AWS that allow that to happen. I think one of the problems that people have in understanding our business is that it's not like other businesses that are similar, that are sort of maybe next to what we do. You look at something, for example, the RPA business. Everyone decided they needed some bots, so we're going to go to our distributor or our reseller and we're going to go get some bots. It's not the way our software really works. That's sort of why our strategy is focused on the higher end. We're talking about a solution. There's a lot of pre-work that goes into it, a lot of sales effort that goes into it. So could AWS be a distributor? Yes. In fact, have we done that before? Yes. They have held the paper of licenses that have flowed through things. But that's not a strategy. That's more of a convenience at that point in time.

So I wanted to maybe circle back on AI. You had talked about data fabric. It seems like that, especially with the net new customers, really strong adoption. I guess maybe help -- what are the implications of that? And the question I often get is, does this catalyze more demand, more activity, more applications being built? What are the ramifications for monetization? So if you can kind of maybe flesh that out a bit.

I think that people are caught up, in many respects, on the idea that AI is a destination in and of itself. And to some extent, that's how it's being cast because people don't want to be left behind, right? Well, of course, I'm doing AI and I got to figure that out. Appian has a lot of AI capabilities that are built in. We help developers move faster. We help end users get access and become more efficient, but we also plug into other algorithms that people have built. But I think one of the things that we do that sets us apart is we make AI investments practical. So what do I mean by that? If you have a wonderful algorithm that does something, you need a way to use the algorithm. It needs to plug into some process that runs your business. And it needs access to data that allows it to continue to learn. And we do both of those things. Our data fabric gives you access to the data to feed into algorithms. And our underlying process capability as a process platform allows you to plug AI algorithms in to kick off processes, to make decisions and processes. So you can't just say, hey, I have AI. There needs to be a way to operationalize it. And that's why I think we're in so many conversations around AI because we are that platform to operationalize it, to actually bring the value to where it's needed in organizations or where the thought process is taking people.

Yes. I wanted to ask about profitability. Mark, you kind of touched on it a little bit. You've accelerated the timeline. We talked a little bit about sales productivity. Where else are you finding efficiencies in the model? And I guess, longer term, how do you think about kind of whether that's rule of 40 or some sort of operating framework, how are you kind of managing the business?

Sure. Yes. So like I said, it is -- growth and profitability both are important to us going forward. And we've been kind of in this efficiency posture to help facilitate that. One of the areas that we talked about with sales, another big area for us is R&D. We do have a really good level of success already in a Chennai, India-based development center. We've got about 150 people out there now who are really kicking butt on some major development efforts and projects. It's not a place where we're looking at offloading busywork or easy work. It's a strategically important development center for us. And it's, of course, a much more attractive cost basis as well. We're very much looking forward to many more years of growth, and we're very much investing in the product and this is a way to do so without hurting our profitability promises, right? We know that investors want more information around our model and how it will look at scale and what metrics are going to be important to kind of sort of judge our profitability progress. So we're working on some of the communication there. I think it's something we would look to do at our next Investor Day. Because part of it is just to get credit for this important new posture of efficient growth. And the other is, of course, the size now. Well, I think that information is pertinent and so we'll definitely start talking about that more.

Yes. I also wanted to ask about, maybe shifting gears a little bit just on international. It seems like that's been a source of steady growth for a while. So maybe whether that's -- whether there's different dynamics there in terms of macro or buying patterns or whether it's just a smaller part of your business and it's catching up, anything you'd call out in terms of kind of the international market and kind of the adoption you're seeing there?

I mean it's going really well for us. There's, I think, a lot of similarities with the U.S. market and where we are in Western Europe and Australia. We've recently been in Japan as well, early days there. But they all have sophisticated companies with sophisticated systems and problems. I think in Europe, there's also a little bit of a regulatory uptick compared to here, and there's some of that helping drive growth. We have a really talented team internationally that are executing really well, good partner ecosystem and yes, the growth there is good. It's sustainable. I don't know Marc, If you have anything else to add?

Yes. I mean I spend a lot of my time in those countries meeting with prospects, meeting with customers. I mean I certainly see the enthusiasm in our customer base, enthusiasm in our partners, enthusiasm around it. And as Mark said, I mean, the use cases resonate. So whether you've done something in Michigan or Tokyo or Singapore, it makes all the sense in the world to explain to someone in Sydney what you've done and they get it. I think we've also been helped by the fact that as we've worked with larger organizations, global organizations, they've taken us global, too. So it's a natural outgrowth of what we do. I mean even if we've had a major focus maybe on U.S. operations, inevitably, that's like, okay, we need to take this here and we need to take it there. And that -- we've been able to leverage that in a lot of cases, too. So it's good to see.

Maybe last one to close it out, top priorities or aspirations for the firm over the next couple of years at Appian and maybe a different focus for both of you, but kind of top priorities.

Well, I was going to say AI is a really important thing, but I would steal your thunder. For us, it's -- on the finance side, it's really to introduce this next phase of the financial statement evolution, which is to bring, again, it's almost like a dead horse here, profitability into the realm of what we're trying to do. And I think that will actually feed a stronger Appian that actually we'll be able to grow in an even better way as well, right? It's more kind of a scale issue and getting the company to prove out a model that is proven as an operating profit engine as well will lend to a multitude of things that are beneficial for growth, not to mention recruiting and being able to compete with these larger software companies. ServiceNow is a company that Marc didn't mention directly, but they're one of the behemoths that doesn't have the sophistication that we have, but they're still a behemoth. And you can't really go up against them if you're pouring through losses. And so we're fixing that. And I think that's an important thing that we're going to do over the next 2 years.

The other thing I'd add to that is that I'm excited about a different way that our market has been described of late. And that's what Gartner has done now with their BOAT terminology, business orchestration and application technologies. And I think the notion of business orchestration is a term I like because it's about the confluence of a lot of different technologies to be brought together to solve bigger macro problems, which is a great way of describing what we've been doing. And I think we're clearly a leader in that space. And yes, that has process, but that has AI. Yes, that has RPA but that has other capabilities and approaches, too. And I think we're uniquely positioned to really succeed in that. And it provides a clearer path to explain to prospects and customers what that means and how that works.

Yes. Great. I think we're going to end it there. Thank you both for being here. Really appreciate it.

Thank you so much.